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Greek banks able to tap investors after stress tests, HFSF Says

Marcus Bensasson, Nikos Chrysoloras & Christos Ziotis

Greece is unlikely to have to inject more money into its banks during the European bank stress tests this year, helping to boost the nation’s public finances, top executives at the Hellenic Financial Stability Fund said.

Money managers including Paulson & Co., Fairfax Financial Holdings Ltd. and Fidelity pumped 8.3 billion euros ($11 billion) into Greece’s four biggest banks in the first half of this year. Institutional investors may again be called on to inject money if the European Central Bank’s own tests in October conclude more is needed, HFSF Chairman Christos Sclavounis said.

“They could be expected to provide the funds,” he said in a July 15 interview at the fund’s office in Athens.

The government-owned HFSF is the biggest shareholder in Greece’s four biggest banks. It was created in 2010 during the country’s debt crisis to prop up lenders that were bleeding deposits and shut out of interbank funding markets. The turmoil culminated in a 240 billion-euro ($338 billion) bailout from the European Union and International Monetary Fund and the biggest debt restructuring in history.

The HFSF may now be poised to return the 11.5 billion euros it has left from the 50 billion euros it received as part of the country’s international aid package. Greek government officials have pushed for those funds to be used to close a financing gap in the country’s bailout program, which the IMF last month estimated at 12.6 billion euros for 2015.

Goal Achieved

“Our strategic target has been to have the a market open for Greek banks so they can cover their capital and liquidity needs and I think that’s a goal that has been achieved,” said Sclavounis. If the stress test identifies further capital needs which are then met by institutional investors, “the conclusion could be that it’s less crucial for these funds to be there and be used as a backup.”

That could still run into opposition from Greece’s debt inspectors, the so-called troika of officials representing the euro area, ECB and IMF, who review Greece’s compliance with the terms of its bailout. The troika has in the past rejected Greek proposals to use the funds elsewhere, insisting a buffer is still needed. In a report last month, the IMF said Greek banks will probably require more capital.

“For better or for worse, whenever there are stress tests, in all likelihood something comes out,” said Anastasia Sakellariou, the HFSF’s chief executive officer. “The fact that private investors took part in the capital increases shouldn’t be underestimated. These are investors that have a successful investment track record. The fact that they took part is a big vote of confidence.”

Officials at Paulson declined to comment, while Fairfax and Fidelity didn’t immediately respond.

Shrinking Economy

Following six consecutive years of recession that wiped out almost a quarter of the Greek economy, banks’ bad loans have ballooned to 77 billion euros -- more than 40 percent of the Mediterranean country’s gross domestic product.

Sakellariou said that after two fundraising rounds, Greek banks are better equipped than their counterparts elsewhere in the euro area to handle any additional requirements from the ECB’s tests. Greek lenders have already committed to undertake further steps to bolster their capital under five-year restructuring plans agreed with the European Commission this year under state aid rules, Sakellariou said.

Cutting banks’ non-performing loans as a proportion of their assets remains one of the last impediments to a return to normality for Greek lenders.

Bad Bank?

The creation a bad bank to take souring loans off lenders’ balance sheets is one option being considered, said Sclavounis. The law would need to be changed for the HFSF to provide any capital for such a bad bank, he cautioned.

“There are many solutions being considered, and this might be a possible one” he said. “There are a lot of question marks that need to be looked at very carefully.”

The HFSF said in a July 10 report the fair value of its holdings in Greece’s biggest banks stood at 18.5 billion euros.

Sakellariou and Sclavounis said they were optimistic of recouping most of the 25 billion euros the fund invested in the banks by 2017. That would help to return the banks to private hands and give Greece a boost in bringing down its debt load. [Bloomberg]